Reading Habits of Warren Buffett and Charlie Munger

You know, I obviously recommend, first and foremost, "The Intelligent Investor," with chapters 8 and 20 being the ones that you really should read. All of the important ideas in investing really are in that book because there are only about three ideas, and those two chapters emphasize two of them.

The three ideas I should elaborate on are: One, think of investing as owning a business and not just buying something that wiggles around in price. The second is your attitude, which ties in with that—the attitude toward the market that's covered in chapter eight. If you have the proper attitude toward market movements, it's an enormous help in securities. The final idea is the margin of safety, which means don’t try to drive a 9,800-pound truck over a bridge that says, "capacity 10,000 pounds." Instead, go down the road a little bit and find one that says, "capacity 15,000 pounds."

I have recently read a new book twice, which I very seldom do, and that book is "Guns, Germs, and Steel" by Jared Diamond. It's a marvelous book. The way the guy's mind works would be useful in business; he's got a mind that is always asking, "Why? Why? Why?" and he's very good at coming up with answers. I would say it's the best work of its kind I have ever read. I read a slightly easier book recently; I’m not even sure of the title—I don't pay much attention to titles when I get into the books—but it's something to the effect of "The Quotable Einstein." It's a lot of his commentary over the years, and it's great reading.

In our never-ending effort to have the Munger Book Club surpass the Oprah Book Club, I was wondering if you could make some recommendations. Hagstrom sent me chapters of his latest book on Warren Buffett called "The Buffett Portfolio," and I didn't read them. I thought his first book was a respectable book but didn't contribute too much to human knowledge. When somebody sent me the second book, a full version, I read it and was flabbergasted to find it not only very well written but a considerable contribution to the synthesis of human thought on the investment process. I would recommend that all of you buy a copy of Hagstrom's second Buffett book.

I noticed the airport was heavily promoting it, and it's called "The Warren Buffett Portfolio." It doesn't pick any stocks for you, but it does illuminate how the investment process really works if you think about it rationally. Another book that I liked very much this year was "Titan," the biography of the original John D. Rockefeller. That’s one of the best business biographies I have ever read. It's a very interesting family story too—a wonderful, wonderful book. I don't know anybody who's read it who hasn't enjoyed it, so I would certainly recommend that latest biography of John D. Rockefeller.

The third book is sort of a revisitation of the subject matter of the book I recommended a year or two ago called "Guns, Germs, and Steel," which was a physiologist's view of the economic history of man. It was a wonderful book, and much of that same territory has now been covered by an emeritus history professor from Harvard, who knows way more economics and science than is common for a history professor. That gives him a better insight, and his book, entitled "Adam Smith," is "The Wealth and Poverty of Nations." The guy's name is Landis.

So I would hardly recommend those three books. During last year's meeting, my wife picked up a copy of a book called "Buffettology" at one of the shops around town. It's written by Mr. Buffett's former daughter-in-law—a very well-written book, very interesting, and it attempts to outline the Warren Buffett approach to investing. I don't know if either you gentlemen are familiar with the content or have read it, and if so, if you would comment on if you think it is a good outline of that type of investing.

Probably the best. I would say the most representative book on my views is the one that Laurie Cunningham has put together because he essentially is taking my words and rearranging them in a more or less linear fashion, taken from a number of years. What he has put together there best represents my views.

And we've got 20 years of annual reports or so, or more, on the internet, plus articles in Fortune and all kinds of things, so it's probably a bias I have. But I like to think that I laid out those views better than somebody who's rewriting them. But I'll let you make that decision.

I do think Larry's done a very good job of taking a number of those reports and rearranging them by topic in a way that makes it a lot easier to read than trying to go through year after year. We've said what we've said in these meetings; we've said in the reports exactly what we do.

Some of the books, I would say, try to take that because people are looking for mechanistic things or formulas or whatever it may be. They may try to hold out that there's some secret beyond that, but I don't think there probably is, and surely nothing you've read—the books. Well, I skimmed that book. I think what we have done all these years wasn't all that hard to do, and it's not all that hard to explain. All said and done, I think a lot of people just don't get it.

Samuel Johnson famously said, "I can give you an argument, but I can't give you an understanding." Phil Fisher was a great man; he died maybe a month ago or thereabouts, and well into his 90s. His first book, and I believe it was "Common Stocks and Uncommon Profits," was written in 1958, and the second book was written a few years later. Those two books were terrific books, and as with Ben Graham, you could really get it all by reading the books.

I met Phil Fisher just once, and it was great. I enjoyed it; I loved it. He was nice to me, but similarly, actually, to my experiences with Ben Graham, where I worked for him, took his class, and everything else. It was in the books. I mean, they were such good writers, and their thoughts were so clear that you didn't need to meet him personally. I enjoyed meeting him personally, obviously, but they got it across in words.

The only time I met Phil was sometime after that 1962 book, or whatever it was, '61 or '62. I was in San Francisco, I think it was in the Rust Building. I may be wrong on that, but I just went there. I used to do that all the time when I was younger—I would go to New York and just drop in on all kinds of people. I guess they thought because I was from Omaha, that one time they'd be rid of me.

I would usually get in to see him, and Phil was extraordinarily nice to me. It wasn't like I gained new ideas, though, from meeting him because I'd already read it in his books. Charlie, actually, I met Charlie in 1959, and Charlie was sort of preaching the Fisher doctrine also to me, in a little different form, but his ideas paralleled those of Phil, so I was sort of getting it from both sides. It made a lot of sense to me.

I don't know what Charlie's experiences were with Feldman. Well, I always like it when somebody who's attractive to me agrees with me, and therefore I've got very fond memories of Phil Fisher. The basic idea was that it was hard to find good stocks and it was hard to find good investments, and that you wanted to be in good investments. Therefore, you just find a few of them that you knew a lot about and concentrate on those.

That seemed to me such an obviously good idea, and indeed, it's proved to be an obviously good idea, yet 98% of the investing world doesn't follow it. That's been good for us; it’s been good for you. Could Charlie Munger create a curriculum or a list of reading and experiences which he believes would lead to his concept of worldly wisdom? Of course, Peter Kaufman has tried to do that in that book that he stitched together out of my old speeches and a lot else.

I didn't want to do it, and he went and saw Warren, and Warren got enthusiastic. Warren suggested this ridiculous name, "Poor Charlie’s Almanac," and between the two of them, they really got me to do it. But the whole idea of doing it is with just the motivation you’re talking about. I think if you assimilate everything in that simple book, you will know a lot more than about 95% of your compatriots, and it's not that hard to do. So Peter Kaufman has made it easy for you.

Yeah, I couldn't be more enthusiastic about what you suggested, and it's been done. It's a sensational book, and anybody that reads it is going to learn a whole lot about life, and you’ll even learn something about making money.

But "The Intelligent Investor" changed my life. I had literally read every book in the Omaha Public Library by the time I was 11 on the subject of investing. There were a lot of books, and they were technical books: Edwards and Magee—I mean, that was a classic in those days—a whole bunch of them: Garfield Drew. I enjoyed reading them a lot; some of them I read more than once.

But I never developed the philosophy about it. I charted stocks; I did all that sort of thing. Graham's book gave me a philosophy, a bedrock philosophy on investing that made sense. I mean, he taught me how to think about a stock; he taught me how to think about the stock market, and he taught me that the market was there not to instruct me but to serve me.

He used that famous "Mr. Market" example. He taught me to think about stocks as pieces of businesses rather than ticker symbols or things that you could charter or something of the sort. That philosophy, further influenced by Phil Fisher's book, led me to understand that it’s very important to get into a fundamentally good business with good economics—one that you could ride with for decades rather than one where you had to go from flower to flower every day.

That philosophy has carried me along now. I've learned different ways of applying it over the years, but it’s the way I think about businesses now. I have not found any aspect of that bedrock philosophy that has flaws in it. You have to learn how to apply it in different ways.

We read for the enjoyment of it. I mean, it’s been enormously beneficial to us, but the reason we read is that it's fun, and you know, it’s still fun. On top of that, we have gotten very substantial benefits from it. My life would have been different if Ben Graham hadn't gone to the trouble of writing a book, which he had no financial need to do at all. You know, I would have had a very different life.

Mr. Buffett, in the forward to the sixth edition of Benjamin Graham's "Security Analysis," you identified four books that you particularly cherish. Three of these books were authored by Graham himself, and their influence on you is well-known. The contributions of the fourth book to your thinking, however, that book was Adam Smith's "The Wealth of Nations," published in 1776.

What that book meant to you is seldom discussed, so my question is: What did you learn from "The Wealth of Nations," and how did it shape your investment and business philosophy?

Well, it doesn't shape my investment policy, but I certainly learned economics from it. My friend Bill Gates gave me an original copy of it. Now, I was able to study this—Adam Smith wrote it in 1776. If you read Adam Smith, and if you read Keynes, Ricardo, and also that little book we've got out there called "Where Are the Customer's Yachts?" you will have a lot of wisdom.

Adam Smith is one of those guys who has really worn well. I mean, he is rightly recognized as one of the wisest people that ever came along. Of course, the lessons that he taught way back then were taught again when communism failed so terribly, and countries like Singapore, Taiwan, and China came up so fast. The productive power of the capitalist system is simply unbelievable, and he understood that fully and early.

He’s done a lot of good. He took an idea of his on the specialization of labor; you know, he talked about people making pins or something, but I applied that to philanthropy. I mean, the idea that you let other people do what they're best at and stick with what you're best at.

I've carried that from mowing my lawn to philanthropy, and it’s a wonderful thing to just shove off everything and say, "Somebody else is better at that than I am," and then work in the field that’s most productive for you. In any system, Keynes wrote about this in 1936, I think it was, in "The General Theory" or '35, and there’s a chapter in it—chapter 12—that was the best, great chapter on investing.

He talked about investment and speculation and the propensity of people to speculate and the dangers of it, and he worded it eloquently. There’s always the possibility of speculation, obviously, and there are always some value investors and all that sort of thing in the market.

But when speculation gets rampant, and when you're getting what I guess Charlie would call social proof—that it’s worked recently—people can get very excited about speculating in markets, and we will have it from time to time in this market. There’s nothing more agonizing than to see your neighbor, who you think has an IQ about 30 points below you, getting richer than you are by buying stocks, whether it’s internet stocks or whatever.

People succumb to it, and they'll succumb in this economy just as elsewhere. There’s also a point that gets to your question. I would say that early on in the development of markets, there’s probably a tendency for them to be more speculative than markets have been around for a couple of hundred years, because markets have a casino characteristic that has a lot of appeal to people—particularly when they see, like I say, people getting rich around them.

Those who haven't been through cycles before are probably a little more prone to speculate than people who have experienced the outcome of wild speculation. So, you know, basically in this country, Ben Graham was in the book I read in 1949, preaching investment, and that book continues to sell very well.

But if the market gets hot; new issues are doing well, and people on leverage are doing well, a lot of people will be attracted to not only speculation, but what I would call gambling. I'm afraid that will be true in the United States, and I think that China, being a newer market, essentially in which there’s widespread participation, is likely to have some pretty extreme experiences in that respect. We will have some in this country, too.